China: Friend or Foe for Investors?

China often finds itself among strategists' top market risks. This year, the risk may be heightened as U.S. President Donald Trump and Chinese President Xi Jinping push to demonstrate their respective countries’ national exceptionalism.

Several firms put out notes this week detailing how the threats can play out, as well as ways investors can capitalize on at least one of China's most ambitious plans: One Belt One Road, which aims to link 60 countries, stretching from Asia to the Middle East.

Whether China can pull off the project remains to be seen, but its commitment shouldn't be doubted, says Jason Trennert, head of Strategas Research Partners, in a note to investors. He cautions against viewing China solely through an economic lens rather than evaluating the risks involved in it becoming a rival to current economic and geopolitical powers. Trade could be one battleground, and Trennert says it would be a mistake--at least this year--to doubt Trump's willingness to follow through on his economic nationalist rhetoric. As a result, he sees trade continuing to be a risk for both inflation and financial assets this year.

The technology sector may be another battleground. In a note this week, Eurasia Group talked about a "China-US Tech Cold War," citing AT&T's (T) withdrawal from a smartphone deal with HuaweiTechnologies as the most recent signal 2018 will see a pickup in bilateral tensions in the heavily owned tech sector. These tensions come against a backdrop when both countries are trying to secure their lead in tech. China is trying to get the lead on artificial intelligence, cloud computing, and high tech, according to a note from the Eurasia Group's geo-technology practice.

There are, of course, opportunities for investors here. HSBC global equity strategist Ben Laidler outlined several themes for this year, noting that Asian infrastructure and One Belt One Road looks like one of the cheapest versus historical and market multiples, with stocks in the group trading at an average 12.6 times next 12-month earnings. HSBC says the Belt initiative should boost the investment cycle in Asia, helping construction and capital-goods stocks. Raw-material companies and service providers, like petrochemical, transport and logistic industries, should also benefit. Some of the stocks that make HSBC's screen include Thailand's Siam Cement (SCC.Thailand), China Merchants Port Holdings (0144.HongKong), China Railway Group(601390.China), Indonesia's Intocement Tunggal Prakarsa (INTP.Indonesia), and Malaysia Airport Holdings (AIRPORT.Malaysia).

The iShares China Large-Cap exchange-traded fund(FXI) is up 37% over the last year and up 1.5% today at $49.69.

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